Google in the middle

Three truths:

1. Google is a middleman made of software. It’s a very, very large middleman made of software. Think of what Goliath or the Cyclops or Godzilla would look like if they were made of software. That’s Google.

2. The middleman acts in the middleman’s interest.

3. The broader the span of the middleman’s control over the exchanges that take place in a market, the greater the middleman’s power and the lesser the power of the suppliers.

For much of the first decade of the Web’s existence, we were told that the Web, by efficiently connecting buyer and seller, or provider and user, would destroy middlemen. Middlemen were friction, and the Web was a friction-removing machine.

We were misinformed. The Web didn’t kill mediators. It made them stronger. The way a company makes big money on the Web is by skimming little bits of money off a huge number of transactions, with each click counting as a transaction. (Think trillions of transactions.) The reality of the web is hypermediation, and Google, with its search and search-ad monopolies, is the king of the hypermediators.

Which brings us to everybody’s favorite business: the news. Newspapers, or news syndicators like the Associated Press, bemoan the power of the middlemen, or aggregators, to get between them and their readers. They particularly bemoan the power of Google, because Google wields, by far, the greatest power. The editor of the Wall Street Journal, Robert Thomson, calls Google a “tapeworm.” His boss, Rupert Murdoch, says Google is engaged in “stealing copyrights.”

Others see Thomson and Murdoch as hypocritical crybabies. To them, Google is the good guy, the benevolent middleman that fairly parcels out traffic, by the trillions of page views, to a multitude of hungry web sites. It’s the mommy bird dropping little worm fragments into the mouths of all the baby birds. Scott Rosenberg points out that Google makes it simple for newspapers or any other site operators to opt out of its general search engine and all of its subsidiary search services, including Google News. “Participation in Google is voluntary,” he writes. Yet no one opts out. Participation is not only voluntary but “is also pretty much universal, because of the benefits. When users are seeking what you have, it’s good to be found.”

Rosenberg is correct, but he misses, or chooses not to acknowledge, the larger point. When a middleman controls a market, the supplier has no real choice but to work with the middleman – even if the middleman makes it impossible for the supplier to make money. Given the choice, most people will choose to die of a slow wasting disease rather than to have their head blown off with a bazooka. But that doesn’t mean that dying of a slow wasting disease is pleasant.

As Tom Slee explains, Google’s role as the dominant middleman in the digital content business resembles Wal-Mart’s role as the dominant middleman in the consumer products business. Because of the vastness of Wal-Mart’s market share, consumer goods companies have little choice but to sell their wares through the retailing giant, even if the retailing giant squeezes their profit margin to zilch. It’s called leverage: Play by our rules, or die.

Sometimes “voluntary” isn’t really “voluntary.”

When it comes to Google and other aggregators, newspapers face a sort of prisoners’ dilemma. If one of them escapes, their competitors will pick up the traffic they lose. But if all of them stay, none of them will ever get enough traffic to make sufficient money. So they all stay in the prison, occasionally yelling insults at their jailer through the bars on the door.

None of this, by the way, should be taken as criticism of Google. Google is simply pursuing its own interests – those interests just happen to be very different from the interests of the news companies. What Google can, and should, be criticized for is its disingenuousness. In an official response to the recent criticism of its control over news-seeking traffic, Google rolled out one of its lawyers, who put on his happy face and wrote: “Users like me are sent from different Google sites to newspaper websites at a rate of more than a billion clicks per month. These clicks go to news publishers large and small, domestic and international – day and night. And once a reader is on the newspaper’s site, we work hard to help them earn revenue. Our AdSense program pays out millions of dollars to newspapers that place ads on their sites.”

Wow. “A billion clicks.” “Millions of dollars.” Such big numbers. What Google doesn’t mention is that the billions of clicks and the millions of ad dollars are so fragmented among so many thousands of sites that no one site earns enough to have a decent online business. Where the real money ends up is at the one point in the system where traffic is concentrated: the Google search engine. Google’s overriding interest is to (a) maximize the amount and velocity of the traffic flowing through the web and (b) ensure that as large a percentage of that traffic as possible goes through its search engine and is exposed to its ads. One of the most important ways it accomplishes that goal is to promote the distribution of as much free content as possible through as many sites as possible on the web. For Google, any concentration of traffic at content sites is anathema; it would represent a shift of power from the middleman to the supplier. Google wants to keep that traffic fragmented. The suppliers of news have precisely the opposite goal.

Take a look at the top topic on Google News right now:

Look, in particular, at the number of stories on this topic that Google already has in its database: 11,264. That’s a staggeringly large number. To Google, it’s a beautiful number. To the 11,264 news sites competing for a measly little page view, and the infinitesimal fraction of a penny the view represents, it’s death.

As I’ve written before, the essential problem facing the online news business is oversupply. The cure isn’t pretty. It requires, first, a massive reduction of production capacity – ie, the consolidation or disappearance of lots of news outlets. Second, and dependent on that reduction of production capacity, it requires news organizations to begin to impose controls on their content. By that, I don’t mean preventing bloggers from posting fair-use snippets of articles. I mean curbing the rampant syndication, authorized or not, of full-text articles. Syndication makes sense when articles remain on the paper they were printed on. It doesn’t make sense when articles float freely across the global web. (Take note, AP.)

Once the news business reduces supply, it can begin to consolidate traffic, which in turn consolidates ad revenues and, not least, opens opportunities to charge subscription fees of one sort or another – opportunities that today, given the structure of the industry, seem impossible. With less supply, the supplier gains market power at the expense of the middleman.

The fundamental problem facing the news business today does not lie in Google’s search engine. It lies in the structure of the news business itself.

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One thought on “Google in the middle”

Aren’t publishers middlemen / rent seekers? And news organizations aren’t they middlemen too (at least before Google and the Internet). Aren’t they as publishers between what a journalist wants to cover and say and what advertisers will tolerate and readers want to read about?

Newspapers, Publishers of all sorts don’t serve the readers, they serve up the readers (their real product) to advertisers (their real customers).

Monopolies of any sort are not good for a market, innovation or an open society. It seems you are complaining only about a recent monopoly and being nostalgic about the old and familiar monopolies that we used to feel there was no other choice about.